Commissioner of Income Tax vs Jagdish Medical Agencies

The Income Tax Appellate Tribunal, New Delhi, has referred the following question of law u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for opinion to this Court:-

"Whether on the facts and circumstances of the case the Appellate Tribunal was justified in law in holding that for the assessment years 1978-79 and 1979-80 interest payment amounting to Rs. 7,200 each by the assessee to the two AOPs were not hit by section 40(b) of the Income Tax Act, 1961?"

The reference relates to the assessment years 1978-79 and 1979-80.

Briefly stated, the facts giving rise to the present reference are as follows:

The respondent which is a registered firm, consists of 7 partners, namely, Jagdish Chander, HUF, Lajpat Rai, HUF, Narender Kumar (individual), Latish Kumar (individual), Smt. Ram Piari (individual), Smt. Prem Lata (individual) & Smt. Saroj Devi (individual) each having 1/7th share. The Income Tax Officer noticed the following amounts on the liability side of the balance sheet of the respondent firm which deals in the purchase and sale of medicines on wholesale basis:

1.

M/s. Narender Investors Corporation (AOP)

Rs. 20,000

2.

M/s. Lajpat Rai Investors Corporation (AOP)

Rs. 20,000

He found that the above amounts were transferred to the AOPs from the accounts of the following partners by debit to their accounts on 1-4-1976 and by credit to M/s. Narendra Investors Corporation (AOP);

Shri Jagdish Chandra s/o Sh. Hukam Chand

Rs. 10,000

Shri Lajpat Rai s/o Shri Hukam Chand

Rs. 50,000

Shri Narendra Kumar s/o Shri Hukam Chand

Rs. 5,000

M/s. Narendra Investors Corporation is an AOP, which came into existence vide memorandum of association dated 1-4-1976, consisting of the following parties:

1.

Shri Jagdish Chand

50%

2.

Sri Lajpat Rai

25%

3.

Shri Narender Kumar

25%

Similarly, M/s. Lajpat Investors Corporation is an association of person which came into existence under a memorandum of association of the same date consisting of the following persons:

1.

Shri Jagdish Chander (75% share)

Rs. 15,000

2.

Shri Lajpat Rai (25% share)

Rs. 5,000

Although there were debit entries on the one hand in the accounts of the partners and corresponding credit entries in the names of the two aforesaid AOPs in the books of the respondent firm, the claim for the deduction of Rs. 72,000 as interest paid by the respondent firm, was not allowed by the Income Tax Officer u/s 40(b) of the Act. In appeal, the learned Appellate Assistant Commissioner confirmed the addition. The respondent, being aggrieved, came up in appeal before the Appellate Tribunal. The Tribunal found that it was not under dispute that the interest payments were made to the two AOPs who were the creditors and that they were not made to the partners. The Appellate Tribunal also noticed that an AOP was a distinct person u/s 2(31)(v) of the Act. In the case of Jagdish Medical Hall (IT Appeal Nos. 1895 and 1896 (Delhi) of 1983 dated 7-4-1984) where the facts were similar, the same view was taken by the Appellate Tribunal vide for the assessment years 1978-79 and 1979-80. Again, in the case of Desai Enterprises (IT Appeal Nos. 560 and 1185 (Delhi) of 1980, dated 4-4-1981 for the assessment years 1975-76 and 1976-77 took a similar view holding that the provisions of section 40(b) were not attracted in the facts and circumstances of the present case, the disallowance of interest was deleted as not justified.

We have heard Sri Shambhoo Chopra, the learned standing counsel for the revenue and Sri R.R. Agarwal, learned counsel on behalf of the respondent-assessee.

u/s 40(b) of the Act, and payment of interest made by the firm to any partner of the firm is to be disallowed. Here the firm had paid interest on the deposits which were standing in the name of an association of person. Under the scheme of the Act, an association of person is a separate assessable entity. Section 2(31)(v) of the Act defines ''person'' to include an association of person also. Section 2(7) of the Act defines-assessee'' to mean a person by whom any tax or any other sum of money is payable under the Act. Thus, for all practical purposes, an association of person is treated as an assessee and is different from a firm. It may be mentioned here that section 40(ba) of the Act specifically deals with a situation where an association of person pays any interest or any other amount to its members. The question is as to whether interest paid by a firm to an association of person in which one of the partners of the firm is also a member, is to be allowed or not.

The Apex Court in the case of Brij Mohan Das Laxman Das Vs. Commissioner of Income Tax, Allahabad, , has held that even for the period anterior to 1-4-1995, any interest paid to a partner who is a partner representing his Hindu Undivided Family on the deposit of his persons /individual funds does not fall within the mischief of clause (b) of section 40. The same principle would be applicable in respect of an interest paid to an association of person also.

It may be mentioned here that in CIT v. Jagdish Medical Hall (IT Reference No. 62 of 1985, dated 5-8-2004) this court has upheld the view taken by the Tribunal in the case of Jagdish Medical Hall (IT Appeal Nos. 1895 and 1896 (Delhi) of 1983, dated 7-4-1984) which order has been relied upon by the Tribunal for deleting disallowance.

Respectfully following the decision of the Apex Court in the case of Brij Mohan Das Laxnwn Das (supra), we are of the considered opinion that the Tribunal has rightly allowed the deduction of interest amounting to Rs. 7,200 and holding it not to be hit by section 40(b) of the Act.

In view of the foregoing discussion, we answer the referred to us in the affirmative, i.e., in favour of the assessee and against the revenue. However, there shall be no order as to costs.